Auburn National Bancorporation(AUBN) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Auburn National Bancorporation, Inc. as of and for the periods ended June 30, 2022, and 2021, including Balance Sheets, Statements of Earnings, Comprehensive Income, Stockholders' Equity, and Cash Flows Consolidated Balance Sheets As of June 30, 2022, total assets were $1.08 billion, a slight decrease from $1.11 billion at December 31, 2021, primarily due to reductions in cash and loans, net, while total liabilities increased slightly to $1.01 billion, and total stockholders' equity significantly decreased from $103.7 million to $76.1 million mainly due to a $29.3 million increase in accumulated other comprehensive loss from unrealized losses on securities Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,084,251 | $1,105,150 | | Cash and cash equivalents | $133,114 | $156,259 | | Securities available-for-sale | $429,220 | $421,891 | | Loans, net | $436,156 | $453,425 | | Total Liabilities | $1,008,144 | $1,001,424 | | Total deposits | $1,002,698 | $994,243 | | Total Stockholders' Equity | $76,107 | $103,726 | Consolidated Statements of Earnings For the six months ended June 30, 2022, net earnings were $3.9 million, down from $4.3 million in the same period of 2021, primarily due to lower noninterest income from mortgage lending and higher noninterest expenses, which offset an increase in net interest income Consolidated Earnings Summary (Unaudited) | (In thousands, except per share data) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Quarter Ended June 30, 2022 | Quarter Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $12,452 | $11,912 | $6,374 | $5,975 | | Provision for loan losses | ($250) | ($600) | $— | ($600) | | Noninterest income | $1,756 | $2,313 | $848 | $1,131 | | Noninterest expense | $9,959 | $9,606 | $5,058 | $4,916 | | Net earnings | $3,882 | $4,292 | $1,801 | $2,286 | | Net earnings per share (basic and diluted) | $1.10 | $1.21 | $0.51 | $0.65 | Consolidated Statements of Comprehensive Income The company reported a comprehensive loss of $25.4 million for the first six months of 2022, a stark contrast to the $0.9 million comprehensive income in the same period of 2021, driven by a significant unrealized net loss on securities of $29.3 million due to rising interest rates Comprehensive (Loss) Income (Unaudited) | (In thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net earnings | $3,882 | $4,292 | | Other comprehensive (loss) income, net of tax | ($29,310) | ($3,344) | | Comprehensive (loss) income | ($25,428) | $948 | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $103.7 million at year-end 2021 to $76.1 million at June 30, 2022, primarily due to an other comprehensive loss of $29.3 million, cash dividends paid of $1.9 million, and stock repurchases of $0.3 million, partially offset by net earnings of $3.9 million - Key changes in stockholders' equity for the six months ended June 30, 2022 include: - Net earnings: +$3.9 million - Other comprehensive loss: -$29.3 million - Cash dividends paid: -$1.9 million - Stock repurchases: -$0.3 million[16] Consolidated Statements of Cash Flows For the six months ended June 30, 2022, net cash provided by operating activities was $4.2 million, net cash used in investing activities was $34.3 million primarily for securities purchases, and net cash provided by financing activities was $7.0 million driven by increased deposits, resulting in a net decrease in cash and cash equivalents of $23.1 million Cash Flow Summary (Unaudited) | (In thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,178 | $5,413 | | Net cash used in investing activities | ($34,284) | ($58,947) | | Net cash provided by financing activities | $6,961 | $82,212 | | Net change in cash and cash equivalents | ($23,145) | $28,678 | Notes to Consolidated Financial Statements This section provides detailed disclosures on significant accounting policies and specific financial statement accounts, including securities classification, loan portfolio composition and credit quality, allowance for loan losses methodology, mortgage servicing rights, and fair value measurements - All securities were classified as available-for-sale, with a fair value of $429.2 million and gross unrealized losses of $38.2 million at June 30, 2022, primarily due to increases in market interest rates[33][34][37] - The loan portfolio totaled $441.4 million at June 30, 2022, with commercial real estate (55%) and residential real estate (19%) as the largest segments, and nonaccrual loans remaining low at $0.4 million[44][54] - The allowance for loan losses was $4.7 million, or 1.07% of total loans, at June 30, 2022, with the company recording a negative provision of $0.3 million for the first six months of 2022[64][122] - Fair value measurements indicate that securities available-for-sale are primarily valued using Level 2 inputs (observable market data), while impaired loans and mortgage servicing rights are valued using Level 3 inputs (unobservable inputs like appraisals and discounted cash flow models)[92][97][99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the second quarter and first half of 2022, highlighting a decline in net earnings due to lower mortgage income and higher expenses, the impact of rising interest rates on the securities portfolio and net interest margin, stable credit quality, strong capital ratios, and ongoing effects of the COVID-19 pandemic Financial Summary and Results of Operations Net earnings for the first six months of 2022 were $3.9 million ($1.10 per share), down from $4.3 million ($1.21 per share) in H1 2021, driven by a $0.5 million drop in mortgage lending income and a $0.4 million increase in noninterest expense, partially offset by a 4% rise in tax-equivalent net interest income to $12.7 million, despite a decline in net interest margin to 2.51% from 2.63% YoY Financial Performance Summary - H1 2022 vs H1 2021 | Metric (In thousands, except per share) | H1 2022 | H1 2021 | Change | | :--- | :--- | :--- | :--- | | Net Earnings | $3,882 | $4,292 | -9.6% | | EPS (Diluted) | $1.10 | $1.21 | -9.1% | | Net Interest Income (Tax-equivalent) | $12,674 | $12,150 | +4.3% | | Noninterest Income | $1,756 | $2,313 | -24.1% | | Noninterest Expense | $9,959 | $9,606 | +3.7% | - The decline in noninterest income was primarily due to a $0.5 million decrease in mortgage lending income as refinancing activity slowed with rising interest rates[123] - The company recorded a negative provision for loan losses of $0.3 million in H1 2022, compared to a negative provision of $0.6 million in H1 2021, reflecting a decrease in total loans and improved asset quality[122] Balance Sheet Analysis As of June 30, 2022, total assets stood at $1.08 billion, with securities available-for-sale increasing to $429.2 million but their fair value decreasing by $39.2 million due to rising interest rates, while total loans decreased to $440.9 million from $458.4 million at year-end 2021, maintaining strong asset quality with nonperforming assets at a low $0.4 million (0.03% of total assets) and an allowance for loan losses of 1.07% of total loans - Securities available-for-sale increased in amortized cost by $46.5 million, but their fair value decreased by $39.2 million due to rising market interest rates[173] - Total loans, net of unearned income, were $440.9 million, and excluding PPP loans, the portfolio decreased by $10.0 million, or 2%, since year-end 2021[174] Nonperforming Assets Trend | (In thousands) | Q2 2022 | Q1 2022 | Q4 2021 | | :--- | :--- | :--- | :--- | | Nonaccrual loans | $359 | $371 | $444 | | Other real estate owned | $— | $374 | $374 | | Total nonperforming assets | $359 | $745 | $818 | - The allowance for loan losses was $4.7 million, or 1.07% of total loans, which management believes is adequate[181] Capital Adequacy and Liquidity The company's capital position remains strong, with all regulatory capital ratios well exceeding 'well capitalized' thresholds, including a Tier 1 leverage ratio of 9.16% and a total risk-based capital ratio of 17.38% at June 30, 2022, despite a decrease in stockholders' equity to $76.1 million primarily due to a $29.3 million other comprehensive loss from unrealized securities losses, which does not affect regulatory capital, and liquidity is considered adequate with access to FHLB advances and other funding sources Bank Regulatory Capital Ratios (June 30, 2022) | Ratio | Actual | 'Well Capitalized' Minimum | | :--- | :--- | :--- | | Tier 1 Leverage Ratio | 9.16% | 5.00% | | CET1 Risk-Based Capital Ratio | 16.59% | 6.50% | | Total Risk-Based Capital Ratio | 17.38% | 10.00% | - The decrease in stockholders' equity was primarily driven by a $29.3 million other comprehensive loss from the change in unrealized gains/losses on securities available-for-sale, caused by rising interest rates[197] - The company paid cash dividends of $0.53 per share in H1 2022 and repurchased $0.3 million of its common stock[197] - The Bank maintains significant liquidity sources, including an available line of credit with the FHLB of $332.7 million as of June 30, 2022[209] COVID-19 Impact and Other Events The company continues to manage the effects of the COVID-19 pandemic, having actively participated in the PPP loan program with only $0.6 million remaining outstanding as of June 30, 2022, and intends to file for a $1.6 million employee retention credit under the CARES Act, while also signing a contract in February 2022 to sell land for $4.26 million, expected to be accretive to earnings by approximately $0.70 per share upon closing - The company entered into a contract to sell land for $4.26 million, which is expected to be accretive to earnings by approximately $0.70 per share upon closing[127][128] - The company plans to file for an estimated employee retention credit of $1.6 million ($1.2 million net of tax), or approximately $0.33 per share, under the CARES Act[129][141] - As of June 30, 2022, the outstanding balance of PPP loans was approximately $0.6 million, down from a total of $20.3 million extended in 2021 under the Economic Aid Act[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Market and Liquidity Risk Management' discussion within Item 2 (MD&A), where the company manages market risk, primarily interest rate risk, using earnings simulation and Economic Value of Equity (EVE) models to stay within established policy guidelines, and was in compliance with its internal policies for interest rate risk as of June 30, 2022 - The company uses earnings simulation and Economic Value of Equity (EVE) models to measure and manage interest rate risk[202] - As of June 30, 2022, both the earnings simulation and EVE models indicated the company was in compliance with its policy guidelines for interest rate risk exposure[203][204] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2022, with no material changes to internal control over financial reporting occurring during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[234] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[234] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company and its bank subsidiary are involved in legal proceedings from time to time in the normal course of business, but management believes no pending or threatened proceedings are expected to have a material adverse effect on the company's financial condition or results of operations - Management does not expect any pending or threatened legal proceedings to have a material adverse effect on the company's financial condition or operations[235] Item 1A. Risk Factors This section refers to the risk factors detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, specifically highlighting that increases in inflation and the resulting tightening of Federal Reserve monetary policy are expected to continue affecting mortgage originations, income, and the market values of its securities portfolio - The report references the risk factors in the 2021 Form 10-K and highlights current risks from inflation and rising interest rates impacting mortgage income and securities values[236] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2022, the company repurchased 7,081 shares of its common stock at an average price of $29.97 per share under a new $5 million stock repurchase program adopted on April 12, 2022, which had approximately $4.8 million remaining at the end of the quarter Q2 2022 Stock Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | — | — | | May 2022 | 7,081 | $29.97 | | June 2022 | — | — | | Total | 7,081 | $29.97 | - A new $5 million stock repurchase program was adopted on April 12, 2022[239] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files - Exhibits filed include certifications by the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL interactive data files[241]